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Lesson 124, Topic 1

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🎥 +✏️Present Value Bond Calculation (Issuance Price) 🟢

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Present Value Application Price of Bond Download

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Geetha Gowda 24 August 2024

Timing 0:35 , Even in case of Notes payable extending more than a year we consider both PV of ordinary annuity and PV of single payment right similar to Bonds. Why is it stated in the recording that NP considers only PV of ordinary annuity. Please confirm

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1. Maroun, CPA 27 August 2024
  
  Hello Geetha,
  
  The treatment of a note payable depends on the specific terms of the agreement, particularly how the principal and interest are structured.
  
  If the note’s payments are periodic and cover both interest and principal over time, only the PV of an Ordinary Annuity is needed because there is no lump sum payment at maturity. An example would be a note payable with a face value of $1,000,000 repaid in four annual installments of $260,000.
  
  However, if the note payable also includes a lump sum repayment of the remaining principal at the end of the term, you would need to use both the PV of an Ordinary Annuity (for the periodic payments) and the PV of a Single Payment (for the lump sum at maturity). This approach is similar to how bonds are treated, where interest payments are considered an annuity, and the principal repayment at maturity is treated as a single payment.
  
  In addition, if the note payable is structured such that both the principal and interest are paid in a single lump sum at maturity, you would not need to use the PV of an Ordinary Annuity. In this case, since there are no periodic payments throughout the term of the note, the entire obligation (both principal and accumulated interest) is settled in one payment at the end.
  For such a note, you would only need to calculate the Present Value (PV) of a Single Payment. This single payment represents the total amount due at maturity, discounted back to its present value at the inception of the note.
  
  Let me know if this clears things up or if you have more questions!
  
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Haya AL-Tamimi 8 October 2024

for calculating the face value at market rate , shouldn’t the answer be 74,725 instead of 74,720 ?

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1. Maroun, CPA 11 October 2024
  
  Hello Haya,
  
  The difference you pointed out between $74,725 and $74,720 comes down to rounding. The present value factor used in the calculation is 0.7472, but the rounding can vary slightly depending on how many decimal places are used in the present value factor.
  
  I hope this helps!
  
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